Saving and Retirement

In addition to statistics on banking, the other aspect of personal finance that I want to provide a quick background on is savings and retirement. Hopefully, these two areas (banking and saving) provide context for discussions on solutions and strategies later on.

Saving

Setting the stage

Let’s start off with a few statistics. All of these are from a 2014 Federal Reserve survey on economic well-being. The sample size is 5900 people.

  • 20% of respondents indicated that their spending exceeded their income in the past 12 months
  • 37% of respondents stated they had not saved anything in the past year
  • 47% of respondents said they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money

Saving can be difficult, especially if you are only earning enough to get by. But saving is still necessary and it compounds on itself. What I mean is by saving for big purchases or emergencies, you don’t need to take out expensive loans. Saving money helps you save money. Make it work for you.

Simple savings strategy

If you asked a fitness expert how to get fit, they would recommend starting slow and working your way up. The same is true with personal finance. The best way to get started is with small, simple, and achievable goals and slowly build better saving habits.

Here is one simple savings plan:

  1. Save $1/day for one month. By the end of the month you will have saved about $30.
  2. Save $2/day for the second month.
  3. Keep saving
  4. Save $6/day for the sixth month. At the end of the month, you will have saved $630. That would put you ahead of the 47% Americans who don’t have $400 of savings. Way to go!
  5. Save $12/day for the twelfth month. By the end of one year, you will have saved over $2000 ($2340 to be exact).

The best part of this plan is that you don’t need to worry about the last month today. I will talk about savings strategies and tips in the future but this is a simple plan to get started.

Retirement

How much are Americans saving for retirement?

Not enough. According to a report put together by the U.S. Government Accountability Office, nearly 41% of Households age 55-64 had no retirement savings. This group will rely on social security to take care them. For the remaining 59% who have some retirement savings, the median amount is $104,000. While this number seems large, it computes to roughly an additional $310/month.

Clearly Social Security will be doing the heavy lifting for supporting retirees who haven’t saved enough. As of June 2015, the average Social Security payment was $1335 but depends on your income. The group that hasn’t saved is also likely to be on the lower side of this average.

If we go just a bit deeper into this number, $1335/month, it is clear that this is not enough to make ends meet. The same government report states that of the group that has some retirement savings, only 27% of households age 55-64 own a home that is paid off. The remaining 73% may still need to make rent or mortgage payments out of the social security benefit they receive. The remaining balance will likely be just enough to survive, and certainly won’t allow the lavish retirement full of golf and traveling that is perpetuated in the media.

How much should you be saving?

I’m glad you asked. One of the best features of Teller, is that it can help you figure out how much you will need at retirement, and how much you need to save each month in two minutes. Just send a text to 646-693-3720 with the message: “How much should I save for retirement?”

In general, there are numerous factors that influence how much you should save for retirement — you can build as complicated a model as you want. In my opinion, it is best to keep it simple and you can get a rough idea just based on your age and current income. From there you can make adjustments to account for life expectancy, stock market returns, inflation. You even also model in whether you expect social security to exist.

How do I start?

There’s a short answer and long answer (which I will save for a future post). The short answer is that both the public and private sector have numerous programs to help people save for retirement. You can start by budgeting at least 10-15% of your income for savings, and putting that savings in a 401(k), or an IRA.

Sources:

  1. https://www.federalreserve.gov/econresdata/2014-report-economic-well-being-us-households-201505.pdf
  2. http://www.gao.gov/assets/680/670153.pdf
  3. https://www.ssa.gov/news/press/basicfact.html